Geithner: National Foreclosure Moratorium “Very Damaging”

Treasury Sec. says suspension would hurt “exactly the kind of people we’re trying to protect” in interview with Charlie Rose Tuesday.

Plus: He says there is “no risk” of a currency war.

From “Charlie Rose”:

Charlie Rose:
This is the cover of The Economist. “Grow, damn it, grow. An 18-page special report on the world economy.” Tell me where the global economy is, what you expect to happen in the rest of 2010 and for the year of 2011, region by region.

Tim Geithner:
The world economy suffered a serious blow, devastating blow. It wasn’t just here. It was really around the world. And around the world, the world’s now healing. It’s growing. IMF expects the world as a whole to expand at a rate of about a little over four percent next year.

Charlie Rose:
4.2, they say.

Tim Geithner:
Yeah, which is —

Charlie Rose:
4.4 this year.

Tim Geithner:
Which is not amazing, but much better than we would have thought would have been possible. But that overall number, which is pretty impressive still, hides huge differences across regions.

Charlie Rose:
Imbalances.

Tim Geithner:
Yeah. And there are parts of the world economy, China, India, Brazil, emerging markets in Asia, Latin America and Eastern Europe that are growing very rapidly now. Those are the most populous countries in the world. And they’ve got a long period of very rapid growth ahead of them. Europe and Japan, growth is much weaker still. Most people expect those economies next year to grow between one and 1.5 percent, which is a very slow recovery. In the United States, the picture is mixed. Right now, I mean, most economists think we’re growing at a rate of about two percent. But if you look ahead, and you saw the blue chip forecasters this morning, the private forecasters, average of private forecasters say they expect the economy to strengthen gradually into ’11, grow about three. That’s not fast enough for us. We want it to be faster. And we’ve still got a lot of work to do to heal the damage caused by the crisis and try to get more Americans back to work more quickly and make sure that we’re growing sustainably in the future. But the American economy, it’s healing. Parts of it look very strong and impressive now. If you look at high-tech, you look at manufacturing, look at agriculture, you look at industrial production, they came out of the crisis much more quickly, really quite strong, even private investment growth, it’s [unintelligible]. Even private investment growth, you know, investment by businesses and capital investment stuff is expanding at a pretty healthy clip. The reason why it’s slower, Charlie, than we’d like is — fundamentally goes back to the causes of the crisis. You know, you had a crisis caused by the fact that as an economy we were living way beyond our means. People were borrowing more than they could afford. They were spending more than they earned, and you had this huge growth and leverage in the financial sector. And when you have a recession, a crisis caused by that, it takes more time to dig out of it. And the things that are causing growth to feel slower now, to seem slower, weaker now, are fundamental to the process of healing. We see weakness in it, people are concerned by weakness in it, but it’s really about future strength, because as the American people repair their balance sheets, as save more of a share of their income, as they reduce their debt outstanding, that’ll make us stronger in the future. In the short term, it means growth is slower than we’d like, but it’s fundamentally healthy for us. And we are, in my judgment, Charlie, a substantial way through the process of healing, of fixing the things that were broken, you know, the financial sector much less leveraged, we’ve had a traumatic huge adjustment in house prices, real estate prices across the country, and private savings rates are already increased quite significantly. So those things are really important for future growth and they’re encouraging, but they do mean that we’re not growing as fast as we’d like, and I think Washington’s got more work to do to try to provide some support for the economy.

Tim Geithner:
No, I wouldn’t say it that way. I think that you know what you’re seeing in housing still now is a national tragedy, still very, very difficult. You know, again, this was a crisis caused by a lot of people were taken advantage of, a lot of people were too optimistic about what they could afford in terms of a house, lot of people were speculating in real estate, and a lot of innocent victims got caught up in the consequences of those basic mistakes. You saw, you know, the nation’s largest banks that ran these servicing businesses, not invest anything like what they needed to, to run that business effectively in a downturn like that. And you’re seeing the consequences of all those mistakes play out still across the American economy. Now, you’ve seen some banks suspend temporarily the foreclosure process so they can just make sure that they’re not causing any injustice to the borrowers and that’s very important for that to happen. And we’re going to —

Charlie Rose:
So you’re pleased to see that happen.

Tim Geithner:
I think where that’s happening again the suspension is to make sure they’re not causing any injustice is very important, but I think it’s important to recognize, Charlie, that if you — a national moratorium would be very damaging to exactly the kind of people we’re trying to protect, because the consequence of that would be in neighborhoods that have been most affected by the foreclosure crisis, where you see lots of houses on the block empty, unoccupied, what it means is those communities will be living longer with houses unoccupied, with more pressure on their house price with the people still in their houses. That would be very damaging, and so again we want to make sure we’re holding these services accountable, that they’re not causing any injustice to people who can afford to stay in their home, and we’re going to make sure we’re careful in doing that. But we also want to make sure that we’re not going to make the problem worse.

Charlie Rose:
Last time I talked to you I asked about Fannie Mae and Freddie Mac, and you basically said that’s next; when does “next” mean?

Tim Geithner:
We are — and we’re going to meet this deadline — we’re obligated under the Dodd-Frank Wall Street Reform Bill to propose what the new system should look like early in the year, and we’re going to meet that, that we’re going to meet that responsibility. And we’re going to fundamentally change the system —

Charlie Rose:
Can you give us an indication as to what it would look like?

Tim Geithner:
Well, we’re going to try to make it substantially better, and we don’t want to be in a situation again ever where you have entities like that where you have the opportunity for private shareholders to take advantage of the public commitment and support and earn huge sums of money, pay that money to their chief executives — little of that benefit went to the homeowner — take on huge amount of risk that could imperil the system, and those are fundamentally avoidable mistakes. They really are. And I think that we can make sure that we replace them with a system that does a better job of making sure that —

Charlie Rose:
But is there a plan or is it just simply waiting to present, are you waiting to hear from Barney Frank and Chris Dodd or —

Tim Geithner:
Obviously we’re going to consult very closely with Chairman Frank and Chairman Dodd and with their Republican counterparts, because this is going to require bipartisan consensus, and we’ve been doing that. We’ve been conducting a series of outreach efforts across the country to make sure we’re listening to a broader range of views and alternative models, and we’re going to take that consultation process and reflect that in a set of proposals for the Congress to consider.

Charlie Rose:
Tell us about unemployment and why it’s at 9.6 percent and why those numbers don’t go down and how long will they be at the level they are.

Tim Geithner:
Unemployment at 10 percent is still overwhelmingly a reflection of how serious the crisis was, how deep the damage was caused by this financial panic, like we hadn’t seen since the Great Depression. And it is going to take time for that to come down. The most important reason why it’s so high is because the economy is not growing rapidly enough to provide new opportunities. And it’s also true that the crisis was so scarring to confidence, it was you know without precedent, very few people running a business today in the United States had ever seen anything like that.

Charlie Rose:
And so they’re not prepared to reinvest and build new factories and hire new people because they’re waiting for what.

Tim Geithner:
Well they’re still, again, scarred by the crisis. They’re still a little tentative and cautious and uncertain about how fast growth is going to be, how much demand for the products is there going to be? So while they’re investing a lot — private investment by American companies grew by an annual rate of more than 20 percent in the first half of the year; looks like in the third quarter it grew close to ten percent annual rate, maybe a little bit less. But they’re still spending at a level that is encouraging because they’re either looking past the crisis and out to the future — and private sector job growth came much earlier in this recovery than it did in the last two recoveries but not strong enough yet to bring down the unemployment rate. You’re still seeing businesses waiting to see how strong is growth going to be, and that’s the fundamental factor holding back investment hiring.

Charlie Rose:
And so what can you as the Secretary of the Treasury do to reassure them and try to create the confidence, so that they will go build up the inventory, hire people and get on with the economic recovery.

Tim Geithner:
Excellent question. The President in September proposed three very important things that will help, we believe, create greater incentives for a stronger investment and stronger recovery coming out of this and more job creation. First, and he gave some more detail yesterday on this, he proposed a substantial multi-year program of investment in public infrastructure in roads [unintelligible]

Charlie Rose:
Why didn’t he do that from the beginning?

Tim Geithner:
Well, we did.

Charlie Rose:
But in a significant way. [unintelligible] created better and quicker jobs.

Tim Geithner:
A substantial part of the recovery act over a two year period was just those kind of investments in infrastructure and we’re seeing it across the country now; I think 14 thousand projects at the state and local levels that are basic improvements in the transportation infrastructure of the country so that we do a better job of reducing costs to businesses getting their goods to market. And there’s a whole [unintelligible] because, again, most of the damage caused by the crisis fell on construction workers, on manufacturing jobs and infrastructure is a good way to produce new job opportunities in those sectors and still be doing things to help us grow more rapidly in the future. But the President also proposed two very smart, very sensible incentives for private investment. One is to make permanent a very generous, much more generous, tax credit for firms that conduct research and development in the United States, you know, investments in the ideas of the future the technology of the future, and he proposed to make that permanent at a more generous level so that more of the investment that’s going to come to meet this growing demand around the world comes in the United States.

Charlie Rose:
And —

Tim Geithner:
One more thing, Charlie. He also proposed to provide a, for a one year period, 100 percent expensing of new capital investment. So a new business makes an investment to buy equipment tomorrow will be able to —

Charlie Rose:
[unintelligible]

Tim Geithner:
And those things are a start and the benefit of these things are they’re good for investment, they’re good for long-term growth and in the past they’ve had a lot of Republican support. And so we think that as we move to extend these tax cuts to the middle class, if at the same time we can do things that are good for investments incentives for business, that would be a powerful mix of additional support. Very sensible designed support for the economy [unintelligible].

Charlie Rose:
Let me just stay with the stimulus program. Let’s just sort of unpack that damage, $700 billion. How much of that was tax cuts?

Tim Geithner:
About $300 billion.

Charlie Rose:
So we’re now left $400 billion and how much of that has been spent?

Tim Geithner:
I think we are on track to have spent 70 percent of that now, up to that point. We’re on that path. So there’s about 30 percent still ahead. Most of what’s still ahead is infrastructure spending.

Charlie Rose:
Right.

Tim Geithner:
But we think we can do better than that and there’s a very strong economic case for adding to that pipeline of remaining infrastructure investments.

Charlie Rose:
As you know, Paul Krugman constantly writes a column over and over and over that says the stimulus should have been larger and Joe Stiglitz and other people believe that to be true. Was the stimulus not larger because you didn’t believe it was the right policy or it was not politically viable?

Tim Geithner:
At the time, it’s worth going back — and by the way, I completely agree with those economists and others who believed back at that time in the transition, in late 2008, that our overwhelming imperative was to make sure we are putting a very substantial program of investment tax cuts alongside what we did for the finances in place at that time. Without that, growth would have been terrible. Unemployment would have been much higher than current levels. At the end of 2008, before the president took office, and even into 2009, because the momentum was so strong, the economy was shrinking at an annual rate of about 6 percent. We’re losing 3/4 of a million jobs a month. And that would have gotten worse, not better, if the government hadn’t acted to put a very substantial, unprecedented scale of support into the economy to break the —

Charlie Rose:
It was rumored at the time, or said at the time that Christine Roma or some other people within the councils were suggesting even a trillion dollar stimulus and recovery program.

Tim Geithner:
We’re going back — around the election, when members of Congress were thinking that they needed to do more, this is before the election, they were talking about a package of stimulus at that point that was in the range of about $200 billion. What we ultimately did was about four times that. And we knew that even though this was a two-year program, designed as a two-year program, and even with a multiple of what people were thinking about before the president took office, that we may need to come back and do more, because we were not certain at that point about how much it was going to take. And one thing we said at the time, Charlie, we said this in the financial sector and on the stimulus, on the Recovery Act, is that the president said we are going to do whatever it takes to make sure we are healing damage as quickly as possible. And we knew that we’d have to revisit that judgment over time. As the president did at the end of last year, where he proposed at the end of last year a series of additional investments in, like, for example, the small business bill that just passed, he proposed 10 months. The additional support for state and local governments, which as we saw on the job numbers last Friday, is very important because you’re still seeing state and local governments have to let a bunch of teachers go because they’re still suffering from the damage caused by the recession. So he proposed, even at the end of 2009, a series of additional targeted investments so that we were providing a little more reinforcement to the economy. Now, again, one more thing. We needed to get something in place quickly because the crisis was so grave at that point. There was a huge imperative for speed. And we did not have the luxury of sitting around — and this is a great credit to the president — of sitting around debating what the optimal —

Charlie Rose:
Whether it should be 700 or —

Tim Geithner:
— [unintelligible] was going to be. And we didn’t want to risk having a long, protracted process in a Congress still divided, as we saw —

Charlie Rose:
But are you saying to me you couldn’t have asked for a trillion because it would have taken too long. It would have been too contentious, not only Republicans and Democrats —

Tim Geithner:
That would be a crisper way of saying what I said.

Charlie Rose:
Okay. So therefore you said let’s take —

Tim Geithner:
[unintelligible]

Charlie Rose:
And if we need more later, we’ll come back and get more.

Tim Geithner:
The president proposed the combination of things, just to go back to the end of ’09, is proposed a series of measures which in total were more than $200 billion of additional targeted support for the economy, which included aid for state and local governments, extending unemployment insurance benefits, infrastructure spending and the small business bill that finally passed a few weeks ago.

Charlie Rose:
Coming out of the G20, there was an emphasis on spending, correct?

Tim Geithner:
You mean the initial G20.

Charlie Rose:
Yeah. The one that was in Canada. Wasn’t there emphasis there on spending and stimulation rather than austerity and cutting spending?

Tim Geithner:
Well, our judgment, Charlie, from the beginning, has been the following, which is that we think that the overwhelming imperative still for the United States and for the other major economies is about growth.

Charlie Rose:
Right.

Tim Geithner:
The bigger risk for us is that we underachieve on growth. And so —

Charlie Rose:
How do you create growth?

Tim Geithner:
Through making sure that you’re investing in things that’s going to make growth strong and get people back to work more quickly.

Charlie Rose:
And spending it in other ways. It’s investment or spending to create growth.

Tim Geithner:
And on the tax side, there’s very important you do on the tax side too. And you know, again, we’re proposing when it come to the tax cuts — but we’re proposing to extend for middle class Americans, for 98 percent of working Americans, the tax cuts — the tax levels now in place for them, and giving them clarity that we’re going to do that is also very important for growth.

Charlie Rose:
Now, that takes — by extending those tax cuts, you are what? If you would eliminate those tax cuts, it would mean another $700 billion in revenue?

Tim Geithner:
Well, let’s step back for one sec. What we proposed and what the really broad based agreement to is to extend the tax cuts that we call the middle class cuts.

Charlie Rose:
Right.

Tim Geithner:
To go to, again, 98 percent of working Americans and 98 percent of small businesses. Now, if we were not —

Charlie Rose:
Those in America that earn less than $250,000.

Tim Geithner:
That’s right. Right. Now, we propose to allow to expire the tax cuts President Bush put in place for those who make more than $250,000. Now, when Congress passed those tax cuts ten years ago, they built in the expiree of those tax cuts so it would look like it was something within our capacity to afford. And we think we should let those tax cuts expire on schedule. And we think there are better things we can do to help bring business investment back, job creation back, than to extend those. And that’s the only thing that really separates us now from the Republicans, is they have — they want to make those permanent. But to make them permanent will require me to go out and borrow $700 billion from our children, from our investors around the world, and we think that’s not a responsible path for the country.

Charlie Rose:
But you are giving up an opportunity of a huge revenue that could be used to engage the deficit and other things, you’re giving that up.

Tim Geithner:
Yes.

Charlie Rose:
Is it part of your thinking now that these middle class tax cuts should be extended beyond a year, or should — I mean, that you are basically buying into, almost, in perpetuity, middle class tax cuts.

Tim Geithner:
Yeah. We are saying — we said we want to leave those in place for a long period of time.

Charlie Rose:
Right.

Tim Geithner:
Because again, the middle class of this country are not just, like, brutally damaged by the crisis. They suffered a long period in the previous decade where the average American household saw no gain in income over that period of time, found it harder to save for college, lived with much more basic insecurity about their economic and financial future. So we think it’s fair to them and good for the country to give them the confidence. We’re not going to put the burden of solving our problems disproportionately on them.

Charlie Rose:
Most people argue that unless this country can deal with several things, with entitlements, and social security and Medicare, unless it can, in a sense, fix things on the revenue side, we will never get the deficit correct.

Tim Geithner:
Yeah. And I think again, it’s — I think this is — no. You said it actually right. We’re living with an unsustainable imbalance between our commitment to the country and the resources we generate. It’s unsustainably high. And it’s going to have to come down over time. And it’s going to require a great national debate and a much broader consensus than it is today among Democrats and Republicans about what the role of government should be and how we can make sure that when we commit to do things, we can afford to do them. And the president has begun that process. Healthcare reform substantially reduces our long-term deficits. But we have a lot of other challenges ahead —

Charlie Rose:
How are you so sure that healthcare reform substantially reduces our deficit? Is it because of efficiency in the system? Is it because of something else?

Tim Geithner:
Well, we are confident only because, in the judgment of the independent observers we all rely on to do this, like the Congressional Budget Office, they look at these policies, and they say, if Congress holds to them over time, they will change how much we spend on healthcare, and they will require Congress to change how we spend the healthcare. And that will — and it will change the incentives for how people use healthcare. And that will bring in those costs. So just to give one example, and these things are complicated, and they’re difficult, but if you encourage people to be more careful in how to use [unintelligible] healthcare, we’re very confident people will spend less on it. They’ll spend more efficiently. And through reforms like that, again, in the eyes of the independent experts we rely on for this stuff, these reforms will substantially reduce the rate of growth in those long-term costs. And that’s one contribution to our long-term fiscal challenges. But we’ve got a lot of other challenges still ahead. And we’re going to have to work to build consensus among Republican and Democrats about how to bring those down. But right now, the most important thing you can do for the economy, and for that long-term fiscal challenge, is to make sure that we’re growing, we’re healing the damage caused by the crisis. And that’s why it’s so important when Congress comes back from the election that they work with us to provide some additional support for the economy.

Charlie Rose:
You wrote a piece in the Washington Post called “Five Myths about TARP.” Just explain to us, and you and I have talked about this before in a number of conversations, what the TARP program was and how successful it’s been and how much of it came out of the Bush administration, and how much of it came out of the Obama administration.

Tim Geithner:
We came into this crisis, again, a terribly severe crisis. The shock that caused the crisis was in the eyes of the historians, much larger, or larger than what caused the Great Depression. So it was a grave moment of peril for the American economy for the global financial system. And we came into that crisis without the basic arsenal of tools countries need to put out a financial fire to stabilize a run in a financial system, to make sure people, individuals are comfortable keeping their money in banks, that banks can lend so businesses can borrow. You know, credit is the oxygen economies depend on. Without it, economies can’t function. And we came into the crisis without those basic tools. In recognition of that and the severity of the crisis, President Bush — and he did the necessary thing. He went to Congress and asked them for authority to fix this problem.

Charlie Rose:
This was Secretary Paulson.

Tim Geithner:
And Paulson and President Bush.

Charlie Rose:
— and Bernanke and you as then head of the New York Fed.

Tim Geithner:
We did. And with that authority, the government then went and did two very important things, which is to put a substantial amount of capital, financial resources, into the banking system to stabilize the run on the system, and provide a guarantee through the FDIC so that banks were able to stay open. Without that, without that everything would have been dramatically worse. And that was a very difficult thing to do because it was politically terribly controversial, it put the government of the United States in the position of helping the same institutions that were perceived to cause the crisis, and it helped slow things down, but when President Obama was elected and he came into office, you still had a system that was frozen, and as we discussed a few minutes ago the economy was still falling off the cliff; banks were not lending, companies could not borrow, the value of the American savings had fallen by about 40 percent. And so what President Obama did, and he made possible is, with that authority that President Bush had started, that program he’d started, is we went and then put in place a very creative, very effective program to open up those credit markets. And we did it in ways that ultimately are going to cost the taxpayer a very modest fraction of their resources. And the way we made it work, Charlie, was we said to the nation’s largest banks that, “You need to demonstrate to us and to your investors around the world what your losses may be, and you need to go out and raise enough capital that you can cover those losses. And if you are unwilling to do that, then we are going to step in and put that capital in and that will come with terms you will not like.” So we made it very powerful for them to go out and try to raise money from private investors, not just to replace the government’s investments which happened very, very quickly, but to make sure they could withstand a much deeper storm. And that was overwhelmingly effective and decisive. And alongside that, we committed substantial resources to [unintelligible] credit markets, so — and to making sure we were helping directly the people most affected by the crisis, homeowners, small businesses —

Charlie Rose:
Okay, $290 plus billion went out during the Bush administration —

Tim Geithner:
Right.

Charlie Rose:
— up to $100 billion, about, has gone out under the Obama —

Tim Geithner:
Only 10 to banks.

Charlie Rose:
Only 10 to banks.

Tim Geithner:
Mostly to small community banks. The remaining part of the resources we committed went to broad based programs to help housing, to help the credit markets for small businesses, to help reduce the cost of lending to a — somebody that wants to buy a car, to put their kids through college, to reduce the cost of borrowing to a municipal government, and what’s the best test of success, Charlie? There’s two basic tests that matter: one is how quickly did growth turn from negative to positive? It happened in the second quarter of 2009, incredibly quickly. How quickly did and how far did interest rates [unintelligible] come down? If you look at any chart of that period of time, they were in the Himalayas, and they came down very rapidly because of the success of these programs, and so the best way to measure success is how much did it cost us to do it and what benefit do we get? And we get huge benefits [unintelligible] —

Charlie Rose:
Okay, now, what was the cost of doing it?

Tim Geithner:
Ultimate cost of TARP itself is going to be well under $50 billion

Charlie Rose:
Okay, so you had a TARP program that you’re saying in the end is going to cost the United States taxpayer 50 billion dollars. I’ve seen figures up to 66 but somewhere in there which is pretty good. It could be even less than that, 50 billion.

Tim Geithner:
It could be substantially less than that. Here’s a nice way to compare this. The S and L crisis which was a much milder crisis, much simpler crisis to resolve cost the Americantaxpayer at that time 2.5 percent of the entire GDP of the country. This crisis, our direct financial cost from this crisis even if you include the GSEs, all in, is likely to be in the range of one percent, could be lower than that as a share of GDP so a fraction of the cost of a much milder crisis because of the success of what the President did.

Charlie Rose:
As you know, you may argue that the public either has not appreciated or you may argue you haven’t explained it very well, you and the President and the Vice President and others.

Tim Geithner:
I agree with that.

Charlie Rose:
What did you fail to do? Did you fail to tell the country why you were bailing out banks and not bailing them out?

Charlie Rose:
And add to that they believe that behind it there is some philosophy of government intervention —

Tim Geithner:
Exactly right, exactly.

Charlie Rose:
that is a hallmark of this administration.

Tim Geithner:
Exactly. I think that if you still looked at what is considered conventional wisdom today, most people think President Obama came in himself and gave 700 billion dollars to banks that we’ll never see again.

Charlie Rose:
And they caused the problem. He gave money to the people that caused the problem and didn’t help the people that suffered because of the actions they did in creating the sub-prime crisis.

Tim Geithner:
So let’s just go back again. So TARP which has caused so much anger and frustration across the country for exactly the reasons you said which is the government of the United States was giving —

Charlie Rose:
They don’t refer to it as TARP, they call it the bank bail out.

Tim Geithner:
Whatever it is. The bank bail out. That was something that President Bush initiated, to his credit, enormous credit, with the full support of the Republican leadership at that time, same Republicans that are now running their party in Congress today. Because at that moment there was no choice for the country. And then he went in —

Charlie Rose:
Everybody bought into the idea of it. The country was at a huge crisis. If something wasn’t done– I mean Warren Buffet and everybody else in the private sector was saying the same thing.

Tim Geithner:
Personally, I fully support it and was, as you know, helped shape it. And he went in and lent money to banks and other companies. All those actions that defined the crisis were started at that moment of great national peril in September and October of 2008. Now when President Obama came in, the government was already 300 billion dollars into that bail out strategy, tens of billions of dollars at stake with their own [unintelligible] industry and what did this President do? What this President did, along side the Recovery Act, along side the actions of the Fed is he put in place this program to get that money back as quickly as possible to make sure that private investment, not the taxpayers resources, was going to carry the burden for solving this problem. And let’s just make one comparison. The President of the United States, since I’ve been in office, put only 10 billion dollars of additional [unintelligible] into our nation’s banks, again mostly for small community banks. We gave 300 billion dollars in tax cuts to working families across the country and to businesses. Compare those things. The scale of resources we put into lowering mortgage costs for the average homeowner vastly outweigh anything we did for banks in this crisis. The president came in and put exceptionally tough conditions on the financial sector, on the automobile industry and AIG so that the taxpayer was protected and we can get out. And the idea that — the idea that this was part of an agenda by this President of the United States, President Obama and his economic team to take over the American economy could —

Charlie Rose:
Including any kind of European socialism.

Tim Geithner:
— is a great myth. It is a great political myth.
[talking simultaneously]

Tim Geithner:
I’ll take all the responsibility for the programs we designed and put in place.

Charlie Rose:
By not explaining to them and not explaining why they were necessary, not explaining —

Tim Geithner:
No, we — I think the president worked very hard to explain why they were necessary, as we all did. But —

Charlie Rose:
[unintelligible] if it sits there that this is the perception —

Tim Geithner:
Look, Charlie, we were not —

Charlie Rose:
— then somebody failed to explain, or you lost the debate.

Tim Geithner:
I will put it [unintelligible]. The president opponents were very effective in creating an alternative reality. And they’re still running on that. But it’s a complete myth. It’s a complete myth. And all you have to do is look at the basic actions we took with the program we inherited, the mess we inherited, and look at what we did with that basic authority. And there is — I’ll say it differently. If you were a conservative Republican, look at what we did to get the government out of the financial sector as quickly as possible. If you are a fiscal conservative, look at what we did to return hundreds of billions of dollars of unused authority to the American people, to the Congress to deal with our future challenges. And if you are a progressive Democrat, what we have done is saved huge amounts of resources, again, that we can use to make sure we don’t see —

Charlie Rose:
But you are getting it from all sides, though. I mean, there’s a perception among the Republicans that this administration, as they say, is sort of European social Democrat. When you see one story after another, and you see these signs talking about it. That’s one thing.

Tim Geithner:
[unintelligible].

Charlie Rose:
I understand that. But acknowledge to neigh perception has taken root, number one. Number two, you’re getting it from the left who is saying that Larry Summers and Tim Geithner, they are of — too friendly with Wall Street. And when it came time to put together the kinds of regulations that were necessary so it wouldn’t happen again, the banks got the better of them.

Tim Geithner:
I completely disagree with that, and I’d like to talk about that for a second. Okay. You’re actually right. You know, it’s a good sign that we’re in a political moment because it cannot be true. You have a President of the United States with a social agenda to take over the American economy and still have substantial fraction of the American people believing, mistakenly, that this president has been too generous to business and to the financial sector. It is impossible for those two things to represent reality. And it’s not fair to the president. And it is a deeply damaging part of the American political debate today. And it’s a sad sign about the state of politics in the country. It is so easy for people to get away with a perception which has so little basis in reality. But again, what we’re trying to do, Charlie, is just to try to explain simply what did we do, and what did that do for the country. And it’s understandable why it’s hard because, again, still, Americans have no — no American living today has really had any real experience with a crisis like this, could not imagine —

Charlie Rose:
And nobody in power had any experience to deal with this —

Tim Geithner:
Exactly.

Charlie Rose:
— kind of situation before.

Tim Geithner:
Exactly. And the people who were part of this from the beginning and were brave and courageous at that time ran away from it as quickly as they could because they knew it would be [unintelligible]. But this president did not do that.

Charlie Rose:
Who are we talking about when we say that?

Tim Geithner:
Well, I would say that a lot of the people who were instrumental in getting this through in the fall of 2008, to their credit, including the Republican leadership, have been eager to walk away from that because it was politically inconvenient for them to be reminded of that. But the president of the United States decided that the only thing responsible for the country was to take on the huge political costs that will become, with solving this problem effectively, up front and early, he knew was going to be deeply damaging for the [unintelligible]. We told him it would be damaging for the [unintelligible]. But he was willing to do it. And to think —

Charlie Rose:
Well, he didn’t have a choice. I mean, the economy was collapsing.

Tim Geithner:
That was our judgment. But a lot of other people disagreed. They thought we should stand back, hope the fire burned itself out.

Charlie Rose:
Who was the most serious figure you know who said don’t do anything?

Tim Geithner:
I don’t want to be unfair to them. But you have to look at — again, our obligation — this is still our obligation, Charlie, if you just want to look forward now. Our obligation still is to act, to do things that are responsive to the major challenges we face as a country. And we have a lot of serious challenges still. And when we get past the politics of the current moment, we’re going to have to figure out how to get people to come together to do this.

Charlie Rose:
I still don’t understand, and I think it’s important because the perception is there, how it came to this, that there is —

Tim Geithner:
I don’t think it’s surprising, Charlie, because — you know, I was scarred by this. I’ve been up to my neck in this before the election.

Charlie Rose:
As the president of the New York Fed, right.

Tim Geithner:
I’ve watched — and I’ve watched very closely what had basically happened to the debate across the country. And I’d lived through, as you know, in my previous experience in government, through a lot of other countries how they handled their financial [unintelligible].

Charlie Rose:
And when you were in the Treasury Department.

Tim Geithner:
Yeah. And in Japan and Asia and emerging markets across that period of time. And you know, what happens — and this is the following, Charlie, which is people — governments confronted by crisis, politicians confronted by crisis, it’s hard. And to solve the problem, you have to do things that you know are going to be politically unpopular like stabilizing a financial system, like preventing a run on a financial system, like doing things, people will say, your opponents will say, are designed to help banks. Because that is so difficult politically for people to do, because it’s so hard to figure out how to do the bold thing, most governments, they sit back, and they wait, and they debate. They convene the experts. They debate all sorts of options. They hope the thing will get better. They hope it’s not as fierce as people fear. They hope it’ll solve itself. And they wait, and they wait. And what happens is it gets worse. It’s more expensive to solve, and if you look at the pattern of crisis, it’s true in the United States in the ’30s, too. That’s the dominant political [unintelligible] crisis. It’s because the politics are so terrible. And what this president did here was to break that basic mold and to make the choice, which was the responsible choice, and say I’ll take that political heat early because nothing is possible unless we do that. And he’s going to be vindicated for that choice by history.

Charlie Rose:
There is also this criticism of the administration: There is nobody with a business background and a business experience in the economic policy making apparatus of this government, of this White House. And every businessman I’ve talked to raises that issue.

Tim Geithner:
I’ve heard that criticism. And you’ve seen lots of administrations and White Houses over time try to figure out how to make sure they got a better mix of experience in the real world as part of the cabinet.

Charlie Rose:
Right.

Tim Geithner:
And you’ve seen lots of different models for that. But you need to look mostly at what the President has decided to do. And I think any business in America today would not want to trade places with the world we faced two years ago. If you look at what the president has actually done to help start to heal the damage caused by the crisis, he has pursued policies that have been enormously important to the basic fortunes of American business. So again, look at any measure. Look at profitability. Look at what’s happened to their stock prices. Look at what they’ve been able to do in terms of expanded investment of those things. Those things would not have been possible without the actions the President took. And he did it because he understood that, ultimately, you wouldn’t solve the crisis unless we got business back on their feet. Now, Charlie, your — this president is — understands completely that future growth in the United States is going to come primarily based on the strength of the conditions we create for businesses to thrive in this country, businesses to innovate, to expand —

Charlie Rose:
Characterize his philosophy since we’ve been talking about it. What’s his economic philosophy?

Tim Geithner:
Well, it’s rooted in that basic recognition that the only source of growth is make sure you create conditions that allow businesses in America to innovate, to create jobs, to expand their investments.

Charlie Rose:
And what’s his faith and confidence in markets?

Tim Geithner:
Overwhelming. But he understands, as I think all Americans must understand today, given what we went through, that it is the job of government — and this is an essential function of government. There are basic public works only governments can do. And I’ll give you an example of that, making sure the financial sector — the concerning [spelled phonetically] risk in the financial sector is a basic responsible function of government, making sure that we’re providing better education opportunities for our children is a basic function responsibility of government, making sure we create better incentives for how people use healthcare, help reduce the growth in cost is a basic responsibility [spelled phonetically] of government, making sure that —

Charlie Rose:
[unintelligible] is a basic responsibility of government.

Tim Geithner:
[talking simultaneously]
It is, teachers — those are basic government functions. And no market economy, no business can thrive with the level of basic neglect and under-investment this country had made in those critical functions, again, education, public infrastructure, a well-functioning financial system, these are part of the basic network, the public works that businesses and market economies rely on. When you get them wrong, you’ve seen the damage it causes. And what the President did, very early in the state of his administration, is not just put in place the conditions for the economy to grow to break the back of the financial panic but to make sure we were fixing the fundamental cause of the crisis in the financial sector.

Charlie Rose:
Two things about what’s happened in the last two years, number one is that the financial reform, does that Dodd-Frank Bill represent what you think financial reform ought to be, the Secretary of the Treasury, is this —

Charlie Rose:
Anything that you thought it should have done that it didn’t do?

Tim Geithner:
[unintelligible] we’ve got some things in there we did not seek, that we did not think were essential. But on the core things the President thought were essential that we put out initially, we achieved all those things, and it’s interesting [unintelligible] we did it, and I’ll give you the best test of what we’ve been able to do with that authority, which is we got the world to agree to a very tough set of new capital requirements, a new global accord on capital requirements, so that the major institutions across the world that operate in these markets around the world now have to run with much less risk, much less leverage. These new requirements will more than triple the amount of capital banks, investment banks, future AIGs have to hold against risk, that is a hugely important accomplishment and we were able to do that because the bill gave us such a strong hand.

Charlie Rose:
Okay, but there is also this question, though, and Gretchen Morgenson [spelled phonetically] writes about this in the “Times” and other places, whether too big to fail still exists, and that we’re going to have financial institutions which are going to take risk beyond what they should because they know they’re too big to fail.

Tim Geithner:
Exactly. And this bill does the two necessary decisive overwhelmingly important things to help reduce that risk of that problem. Again, the first is make sure that these large institutions have to run with much less leverage. We have — the bill also caps their size so we can’t have a more concentrated financial system. That’s hugely important. Now, they will make mistakes in the future. There’s no doubt about it. It’ll happen. But if you make sure their capital requirements are much higher so leverage is much less, the risk they run [spelled phonetically] is much less, then when they make mistakes in the future that’ll cause much less damage, much less likely any future government would have the need to come in and do these kind of things. But that’s only half of it. The other thing this bill does is to give us the power to dismember them when they screw up without causing damage to the economy as a whole. So what this bill gives us is the ability to come in if the firm takes risks that would imperil its future, can’t survive without the government, to come in, wipe out equity holders, replace management and the board, dismember, restructure the company, like what we did in AIG, so it can’t exist again to take risk in the future again, and by doing that we’ve made it much more likely that any executives of any board of directors at one of these firms, any equity holder would want to court the fate of a firm like AIG, got itself in the position where the government would have to step in, because they look at what we did in that context, what the bill authorized us to do, and you can see in the future we say “We are not going to put the taxpayers’ money at risk in these crisis to save you from your mistakes in the future.” And now those two things, they won’t solve all problems. You know, we’re going to have a market oriented financial system where there is a lot of innovation, lot of competition, responsible risk taking, and people will make mistakes in the future, but these two things will make those mistakes much less damaging.

Charlie Rose:
I want to move to China, with respect. If you would read the newspapers over the last three months, the impression you have is that all that Tim Geithner does is try to get the Chinese to let their currency appreciate, because — and that they are resisting as much as they can, saying, “We’re going to take care of our growth, and you don’t understand — we’ve got problems of our own, and we depend on exports to the United States and other places, and those exports are a means that we can employ our people. And we’re not listening to” pretty much what you say about currency appreciation. Where is that today?

Tim Geithner:
You said it exactly right, and this is a really important question for us and for China. But let me just start with what’s actually happening where it matters for us. China, over the last six weeks or so, has started to let their currency appreciate at a pretty significant rate. It’s only been now in the last six weeks or so, about two, 2.5 percent. But this is going to be a gradual process, and what matters to us is that they continue to let their currency rise to reflect those market forces, in that case. And if you look at the last time China moved in this, Charlie, between 2006 and 2008 China let their currency appreciate against the dollar by about 20 percent. Now that was a gradual process then, too, but that was a very substantial and very important change for them. Now they stopped that process in the crisis, because frankly they were worried about the state of the world, and they thought a period of stability would be good. And that was a responsible thing, but now they are starting to let it move, and what we want to do is to maximize the incentives they have to let that process go as far as it needs to go.

Charlie Rose:
And [unintelligible] maximize those incentives.

Tim Geithner:
Well China takes a long view of these things, as you know, and they understand — at least a substantial fraction of the people in the leadership in China understand that it is very much in China’s interests to do this. And there are two reasons why that’s the case. One is that China — you know, it’s a large, independent country, and if you tie your currency to ours, then in effect what you’re doing is letting the Federal Reserve run your monetary policy. China needs to have the independence to be able to set policy for what makes sense for their country. So it’s very much in their interest to, again, move to a more flexible system that allows them to run their policies in ways that helps contain inflation risks in China. There is another good reason, though, for it, too, and I think that a substantial fraction of the leadership in China recognize this. China, over time, wants to get better at producing things that are — create more value, generate more income for their people. And you can’t do that if you’re in effect favoring low-value-added assembly operations that aren’t going to generate much income for your people. They’ve got to — like a lot of people they want to make sure they’re feeding and providing opportunity. And the best way for that to happen is to make sure the exchange rate is working with that objective, not against it. And right now, if they keep the currency really low and undervalued, it’s really working against that basic objective of development. So, they’ve got a long view. I’m very confident over time that this is going to happen. We just want to make sure it’s happening at a gradual but still significant rate.

Charlie Rose:
But as soon as you say that, “I’m confident that they will do it over a gradual way, and that they will perhaps also build up enough consumer demand in their own country so that they — so they’re not so dependent on exports and all of that” — knowing that they have always said economic growth is essential for us so that we do not create social tensions, any more than they are, within our society.

Tim Geithner:
But they know the world has changed for them, and the crisis illustrated this for them. Of course they care about growth like we care about growth. There’s nothing exceptional in that.

Charlie Rose:
What’s the world say? How has it changed for them?

Tim Geithner:
What they now realize that if they try to run a strategy that’s too reliant on exports or heavy investment in their [unintelligible] enterprises, that because they’re getting so big, that’s not going to be a tenable strategy. And the best way to make sure they’re growing in the future is to shift the strategy of growth to something that helps support more consumption at home. And they recognize that. And although people — I know — the exchange, people understand because it’s something you can measure, you can look at. And they understand why it’s important. But the exchange rate, for it to work, has to be complimented by those broader changes that shift the basic strategy of growth. And again, Charlie, this is — we measure this stuff. We have a huge economic stake in this relationship. Our exports to China, because of what they’re actually doing in terms of policies, are growing about twice the rate of growth of our exports to the rest of the world. If you look at the rate of growth of our exports to China compared to the rate of our exports to the rest of the world, they’re growing very rapidly because China is starting to move to favor domestic demand and consumption. And what we want to do is build on that process because [unintelligible]. Because of course we also want China to play by the rules of the game everybody else plays by.

Charlie Rose:
Do they do that?

Tim Geithner:
Well, they — we’d like them to do it more.

Charlie Rose:
All right. But do they care about international respect, to use the words that was said before by the president of the World Bank. Do they recognize and do they respect the fact that they need to act like a stakeholder in the world community?

Tim Geithner:
China is a complicated place. You can’t tell it from the outside, but all the time, just like in the United States, they’re having a huge debate about what policy course to take. And again, I think there is a substantial number of people in leadership in China today that recognize that Chinese future lies — and it is critical to their interests as a country — in becoming a full player, accepting the broader rights and responsibilities that the rest of us live with in this system today.

Charlie Rose:
Or trade organization or wherever it is.

Tim Geithner:
Exactly. And I think they recognize that’s important to them. But again, they’re like — they have their politics, and they’re having a — it’s a very difficult debate internally all the time on these kind of things, with a very tenuous balance between the people that believe those things and the people who think China’s future lies in its past, which is not tenable [spelled phonetically].

Charlie Rose:
Okay, there is also this, though, when you talk about currency, I also read stories, especially after the meeting that the IMF had, of a currency war.

Tim Geithner:
No risk of that.

Charlie Rose:
No risk.

Tim Geithner:
No risk.

Charlie Rose:
You’re not worried about that at all. You’re not worried about other countries saying, you know —

Tim Geithner:
Well, I just think it’s a —

Charlie Rose:
— we’re not going to let our currency appreciate either, and all this other stuff.

Tim Geithner:
The reason why this is —

Charlie Rose:
Didn’t Brazil do that recently, or threaten to do that or —

Tim Geithner:
They used that phrase.

Charlie Rose:
Yeah, they did.

Tim Geithner:
Yeah. So let me explain what’s happening and why it’s important. So because China’s currency is substantially undervalued by really only any measure. And because they’re trying to make sure it doesn’t rise too quickly, what’s happening is a bunch of other emerging market countries [unintelligible] good example, but there’s a lot of other ones.

Charlie Rose:
Right.

Tim Geithner:
There’s a lot of capital flowing to them because they’re letting their currencies move. And that’s unfair to them because what’s happening is, as China holds its currency down, their currencies are moving up. And they’re having to work very hard to make sure they’re not at an unfair disadvantage with China. And that’s why this issue, which people like to frame as uniquely an American preoccupation, is really much more important to the rest of the world and is really a global problem as a whole.

Charlie Rose:
Okay. Have we discovered, once again, that there is no decoupling from the American economy?

Tim Geithner:
Yeah. There’s a — we absolutely have discovered that. I don’t think there is any — I don’t think it was a plausible argument before the crisis. But certainly the crisis proved that countries are much more closely linked today, and people — every country in the world’s economic fortunes are deeply tied to our own here in the United States.

Charlie Rose:
And is there a new — how do you look at the new economic reality of the fact that China is now the second largest economy? And that all the growth is in the emerging growths, and that’s where the future growth is? What does that mean for the long run for the United States and its economic health?

Tim Geithner:
I think it is overwhelmingly good for the United States. I think we will benefit uniquely from the reality that we are still exceptionally good as a country in producing efficiently the things those countries need to grow and expand. This is true in agriculture. It’s true in high-tech across services, a huge fraction of what we do exceptionally well in this country are going to be a major source of their future growth. And American companies, and I think, thus, American workers, will participate substantially in that process of development outside of the United States. Our challenges, overwhelmingly, are about things we face in the United States, about how to make sure we’re growing, we’re bringing unemployment down, that we’re improving —

Charlie Rose:
Are we bringing unemployment down? You’re saying that’s what we have to do.

Tim Geithner:
These are what our challenges ahead of us across the country. So how do we —

Charlie Rose:
Unemployment down.

Tim Geithner:
— educate our children better? How do we make sure that we’re creating better incentives for businesses to expand and grow? How do we make sure we’re going to make progress in restoring some basic gravity responsibility to our unsustainable fiscal deficits? Overwhelmingly how we do in the world, Charlie, will depend on how effective we are in managing those challenges in the world.

Charlie Rose:
Okay. But here is the big question, as you know. I mean, I don’t have to tell you this. You know, you’re talking about investments at a time in which people are saying the biggest problem the United States has is the size of its debt. And there is a political uprising against debt.

Charlie Rose:
For our future depends on an investment in research and development, an investment in science, an investment in technology, an investment in education.

Tim Geithner:
That’s right. Exactly right. And that’s —

Charlie Rose:
And how do we — where was the tradeoff? And how do you — what’s the message of leadership here?

Tim Geithner:
The only strategy that I think has any plausibility of success is to make sure that in the short term we are still working to heal the damage caused by the crisis, to do these things I described at the beginning, stronger incentives for businesses to invest now today. And at the same time, make sure we are increasing confidence in Americans and among investors around the world that we’re going to find the political will in Washington to bring those deficits down over time. Now, that’s why the debates we’re having on the tax side are so important. That’s why the president has proposed to freeze discretionary expenditures for a long period of time. That’s why you’re seeing enormously important reform supported by Secretary Gates to reduce our military spending. We — that’s the only plausible [unintelligible] that we know was to say you do growth now in the context of restoring some balance and responsibility.

Charlie Rose:
Growth in the short term to restore balance, create employment and —

Tim Geithner:
Yeah. And at the same time, you’re —
[talking simultaneously]

Tim Geithner:
— bring those deficits down over the medium term, over the next several years to a level that’s more sustainable. And that’s exactly what we’re going to do. And what the president has proposed now won’t solve that problem completely. But what the president’s proposed will bring our deficits down by more than half as a share of our economy as a whole over the next three to four years, we need to go beyond that. And there’s a bipartisan fiscal commission the president created that is supposed to recommend policies on December 1st.

Charlie Rose:
By the end of this year, right.

Tim Geithner:
— to begin that process. And again, this has to be bipartisan. It’s not something we can do on our own. And the president, as you know, under our Constitution, can’t solve those [unintelligible].

Charlie Rose:
Are you convinced that the political system we have will allow the kind of action that’s necessary to deal with the kind of challenges we face? That we’re not politically dysfunctional.

Tim Geithner:
That is the great question we face. That’s what Americans are worried about. That’s what people around the world are looking to us to do. And our job — and we’re going to act. Our responsibility is to act still. These are not things that are going to go away if we ignore them. And what the president will do is he will propose what we believe are the best things for the country. We’re [unintelligible] monopoly of wisdom. We’ll look to ideas. We have to work with people on the Hill to make sure we get this done. But we need those elected representatives in Washington to come with us, join with us to make sure we’re doing things to fix the problems we still face as a country. And it’s not something that we can solve by just plain politics all the time. We’ve got serious challenges that require some serious —

Charlie Rose:
[unintelligible] common sense to the American people.

Tim Geithner:
Yeah. And we need them to — we need Washington to act. And he can’t act alone. We need them to come with us.